First, foreign firms should register rights for which they seek protection in China. Rights that have not been registered in China cannot be enforced. Second, they must understand the Chinese legal system. Though not perfect, it does function, and companies can take actions within the system to protect their rights.

IP enforcement
Most international companies' anti-counterfeiting strategies have developed on a piecemeal basis with actions principally aimed at cutting off the source of **** products and keeping counterfeiting under control in main markets. Often, different in-house counsel are responsible for actions in different jurisdictions. In some cases, junior employees with little experience are left to handle counterfeiting matters unsupervised. Their only guideline appears to be to maximize seizures and minimize costs, which often results in disjointed and uncoordinated actions. Senior staff with experience should supervise such important work.

In recent years, many companies have focused their efforts on raiding factories that produce **** products in China. This has some effect in reducing the production of counterfeits. Over time, however, the number of products seized falls, and numerous repeat offenders appear. The focus on the volume of seizures can also mean that companies focus on easy targets, such as warehouses, and not factories. Companies should not judge the success or failure of their anti-counterfeiting program by the number of goods seized. This is a raw indicator that can be easily manipulated and does not necessarily reflect whether progress is being made in rooting out the key players. Companies must invest appropriate resources in anti-counterfeiting efforts, paying particular attention to the investigation and identification of main players.

Companies should also share information obtained from actions in other countries among key staff and analyze how counterfeiters operate worldwide. Given the internationalization of counterfeiting operations in recent years, the more data a company analyzes, the more likely it is to connect the dots that lead to the counterfeiting mastermind.

Litigation
Many foreign companies shy away from civil litigation in China because the system seems too difficult to use. There are certainly difficulties in using the system, some of which have been discussed above, but with a well-prepared case, it is possible to win and add to the counterfeiter's cost of doing business.

Practice what you preach
All IP lawyers who practice in China have war stories of clients coming to discuss IP issues in China and, in many cases, becoming quite upset about infringements of their rights. Ironically, the very same people then ask for directions to the Silk Street Market in Beijing or Xiang Yang market in Shanghai, both well known for the wide variety of counterfeits for sale.

Employees of a company from top to bottom must appreciate that there is no "good" counterfeiting. Buying counterfeits of any type perpetuates the industry and sends a wrong message to PRC authorities about companies' commitment to fighting counterfeiting. All companies serious about tackling counterfeiting should not tolerate the purchase of **** products, even for personal use.

The enforcement of IP rights has improved over the years in China, but challenges remain for both the PRC government and for foreign companies seeking to protect their rights. Implementing the changes suggested in this article would improve enforcement of IP rights in China significantly.

What about Patents and Trade Secrets?

Counterfeiting is not the only intellectual property issue for companies in China. The protection of patents and trade secrets is also becoming more important (see the CBR, May-June 2005, p.36). Here too, weaknesses in China's legal system and certain company approaches have made enforcement difficult.

First, China lacks an effective trade secrets law. The Anti-Unfair Competition Law and Criminal Law both have sections on trade secrets. Criminal action can be effective, but it is difficult to get the **** to take on such a case. Moreover, the Anti-Unfair Competition Law provides only general guidelines for trade secret actions.

On a potentially encouraging note, a draft interpretation issued in late 2005 by the Supreme People's Court appears to have addressed many of the main problems with the trade secret provisions of the Anti-Unfair Competition Law. This interpretation defines trade secrets, provides for reversal of burden of proof when a prima facie case of misappropriation is shown, and provides methods for calculating damages when a breach is proven. The interpretation also makes clear that injunctions are available for a breach of the trade secret law, although no clear method is yet prescribed for enforcing an injunction if a defendant does not comply with the court's order. How this interpretation will be finalized and applied in practice will be important to encouraging greater investment in high tech industries in China.

Many companies transfer technology to China without taking into account the weaknesses in the legal system. Before transferring technology, companies should

• Analyze the need to transfer technology Do not be blinded by partners' demands for technology. Ask whether it is really necessary to transfer this technology.
• Carefully choose the recipient of the technology If technology is transferred to a state-owned enterprise, there is a far greater likelihood of leakage than if it were transferred to a private firm.
• Attempt to break up the technology to be transferred so that it is harder for others to use, if misappropriated.

Patents

Patent litigation is becoming more common in China. The laws and various opinions governing patent litigation are in line with international practices. Given the technical nature of patents, however, China should consider creating specialized courts nationwide to handle patent cases. A number of countries, such as England and Japan, have already done this, and it has led to greater certainty in decisionmaking and greater trust in the system.

- Douglas Clark

Source: This is an excerpt from an article originally published in the Jan, 2006 issue of the China Business Review.